After showing a solid show in 2021, most real estate stocks have been battered in 2022 so far. The benchmark BSE Realty index itself has fallen 9 per cent year-to-date against a 6 per cent rise in the BSE Sensex, with stocks such as Indiabulls Real Estate, Godrej Properties, Sobha and Sunteck Realty plunging anywhere between 20 per cent and 50 per cent.
Post Q2, which is seasonally a soft quarter, analysts have turned positive on the sector outlook. While realtors remained cautious about raising their FY23 pre-sales estimates, analysts said the demand may remain strong till rates rise by another 75-100 bps or until mortgage rates cross double-digits.
Elara Securities said the residential sales through nine months of 2022 exceeded pre-Covid annual sales and was on course to breach the 2014 peak.
It said no major impact of subsequent interest rate hike by the RBI was seen and that the sector is well-placed to absorb further rate rise. Besides, it noted that most major developers hiked prices amidst escalation in input costs and overall increased sales. Luxury segment continued to witness sustained demand with a clear shift to larger homes, it added.
In the commercial space, ICICI Securities noted that office market saw net absorption of 8.7 million square feet (MSF) against June quarter's net absorption of 9.6 msf. In the first nine months of 2022, net absorption stood at 24.2 msf against the Covid impacted years of CY20 and CY21 which saw 20msf of net absorption each at pan-India level.
"We estimate net absorption of 31.7msf in calendar 2022 and 33.5msf in 2023 with the Bengaluru market likely to lead the way with annual net absorption of over 10msf in both years," it said.
Among real estate stocks, Indiabulls Realty has tumbled 50 per cent, followed by Godrej Properties (down 32 per cent), Sobha (down 31 per cent), Sunteck Realty (down 20 per cent) and Brigade Enterprises (down 4 per cent). Stocks such The Phoenix Mills (up 46 per cent), Oberoi Realty (up 2 per cent) and DLF (flat) performed well during this period.
In 2021, these nine BSE Realty index constituents had delivered a minim of 27 per cent return and a maximum of 116 per cent return, data compiled by database AceEquity suggests.
Motilal Oswal said the top 12 listed companies witnessed an 8 per cent sequential and a 29 per cent YoY growth in pre-sales in the September quarter.
It is worth noting that in volume terms, these companies cumulatively reported just 3 per cent YoY growth.
While the sales mix has played its part, especially for Oberoi Realty, it is evident that the industry has taken sufficient price hikes to offset the cost inflation, Motilal Oswal noted.
"Except for Sobha and Mahindra Life where launches were relatively moderate (from 1QFY23 levels), all companies witnessed healthy launches in Q2, with the top 12 listed companies cumulatively launching 14msf of projects," Motilal Oswal said.
In the H1FY23, the top 12 listed companies clocked pre-sales of Rs 31,500 crore, up 85 per cent YoY, down only 6 per cent from H2FY23 levels, despite a 170 bps rise in mortgage rates.
Motilal Oswal said it continues to prefer players with an ability to generate robust cash flow over the next three-to-four years and invest in developing their pipeline, which will provide further growth visibility and lead to a re-rating.
It has 'Buy' rating on Macrotech Developers, Oberoi Realty Prestige Estates, Brigade Sobha and Mahindra Life, while the domestic brokerage is 'Neutral' on DLF and Godrej Properties.
Macrotech, Developers, Prestige Estates and Brigade Enterprises are its preferred stock picks.
Elara has upgrade Godrej Properties to 'Buy' from 'Accumulate' with an unchanged target of Rs 1,508 on one-year forward NAV of FY24. It has downgrade Prestige to 'Accumulate' from 'Buy' with an unchanged target of Rs 525, due to the run-up in the stock price in the past three months. It has 'Buy' on Oberoi Realty, Sobha and Mahindra Lifespace and 'Accumulate' on Brigade Enterprises.
"We remain bullish on office asset developers and reiterate our positive stance on DLF, Embassy REIT and Brigade Enterprises," ICICI Securities said.
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